Book Reviews

He hoped a federal incorporation law would help the work of that other fractious Wyoming native, the trust-busting Thurman Arnold, in prosecuting alleged monopolies. Creatures of the state, said O'Mahoney, should obviously be subject to license by the state. True enough, the majority of big Ameri can corporations seemed to be incor porated already in the state of Del aware, so why the need for federal chartering? O'Mahoney's logical an swer was that the normal corpora tion was set up to do business on a continental scale, so it was to the federal government that it should apply for the right to exist. O'Mahoney's crusade, a casualty of World War II, has been pretty much forgotten, but now Ralph Nader has picked it out of the dustbin of history without much concern about giving his predecessor credit for it. The new life that Nader has pumped into the O'Mahoney theory has provoked Robert Hessen, an authority on the steel industry, into joining issue with Nader and all his anti-corporate raiders. Hessen's own trail-blazing book on corporate theory, In Defense of the Corporation (Hoover Institution Press, Stanford, California 94305, 127 pp., $7.95 hardcover) is an eye-opener to me, for I had always considered that the one issue of corporate limited liabil ity did involve a special state dis pensation. Mr. Hessen now tells me that I have been wrong, and he puts up a strong historical and legal ar gument for his case.

The notion that the corporation is a creature of the state is deeply embedded in the common law. The reason for this, says Hessen, is that in feudal England, when the com315 316 THE FREEMAN May mon law evolved, only the king had the power to endow groups of indi viduals with special rights-really permissions-to do anything. Guilds, with royal charters, were empowered to establish their own price and wage controls. The medieval church, a corporation, held its lands in feudal tenure. Every association, from a university to a hospital, was in or of the system set up by William the Conqueror to in sure that nobody should have an inalienable right of his own. In the late seventeenth century, parlia ment cut itself in on the deal, as suming its responsibility for protect ing ((English liberties," but it was never conceded in England that any right was ((inalienable." It took the Virginian, Thomas Jefferson, to as sert inalienability for the American colonials.

Unfortunately, that other Vir ginian, Chief Justice John Mar shall, who was steeped in the legal commentaries of Sir William Blackstone, chose to paraphrase English authorities going back to Lord Chief Justice Coke when, in the Dartmouth College case of 1819, he declared that ((a corporation is an artificial being, invisible, intangible, and existing only in contemplation of law." Marshall's opinion has ruled ever since. But why, so Hessen asks, should precedents evolved by the courts to apply to medieval feudal institutions be extended to business corporations created centuries later to expand the inalienable idea of freedom of association to the mar ketplace? Matters of Contract Against the medieval Nader idea that the corporate features oC(entity status, perpetual life and limited liability" are state-created pri vileges, Hessen poses his own ((inherence theory." To do this he has to break down the distinctions ordinarily made between partner ships and corporations. In Nader theory, which derives from tradi tion, a partnership is an aggregate, an association of individuals acting together to pursue such things as the making of a profit. Unlike a corporation, it does not have a legal being that exists independently of its owners. The proprietors of a partnership incur unlimited per sonal liability for business debts.

They can be sued for all they own. But if a corporation cannot meet its obligations, shareholders can't be assessed to cover deficits. This is the theory of the matter, but Mr. Hessen finds it deficient. Looking at actual business practice, Mr. Hessen says that ((entity status, perpetual duration and limited lia bility" are all contractual matters. Partnerships can avail themselves of them, too. Entity status happens to be an optional feature available to unincorporated businesses includ1979 IN DEFENSE OF THE CORPORATION 317 ing partnerships (owners can desig nate trustees to represent them in lawsuits, for example). Partners can make their enterprise perpetual by adopting a continuity agreement specifying that the firm will not be liquidated if one of the partners dies or withdraws. As for limited liability, how is it to be explained by contractual theory in contrast to state-created privilege? Mr. Hessen says limited liability is actually the result of an implied contract between corporate owners and their creditors. It is a freely accepted and negotiated mar ket transaction. You do business with a corporation on the under standing that your Uright of recov ery" (the phrase is Adolph Berle's) is limited to what is in the corpora tion's common fund. As for partners in a partnership, they may safeguard themselves by purchasing' liability insurance. This amounts in practice to a limitation on their lia bility. Corporations use liability in surance, too.

So, if Hessen's line of reasoning is to be followed, there is no real dif ference between partnerships and corporations when it comes to the rights of individuals making use of them to do business. Mr. Hessen. speaks of the rights of individuals to pursue goals. No matter what form of voluntary venture they choose, they neither gain nor lose any of these rights. Regardless of the type of organization a person selects, it can only acquire those rights which its members possess as individuals. No Special Privilege The English legal historian, Fred erick Maitland, noted in 1900 that the description of a business associa tion as a corporation was ~~a mere labour-saving device, like stenog raphy or the mathematician's sym bols." The use of the symbol should not be to obscure the individual rights of its members, whether they are shareholders, directors or offi cers. At every stage of growth, a corporation is still a voluntary as sociation based on contract. At no stage is it dependent on state created privileges.

In history many corporations have evolved out of partnerships. They do this when the proprietors, finding it inconvenient to operate as so many individuals possessing agency pow ers, decide to choose one or a few of them as managing partners and re move agency powers from all the others. From here on the way to reorganization as a corporation, with the partners becoming the orig inal shareholders, is an easy one. Mr. Hessen asks a single question: at what point in the continuum from partnerships to corporations do in dividuals lose their rights? At what point does an enterprise become a Ucreature of the state"? Galbraith, before Nader, is re318 THE FREEMAN May sponsible for the theory that corpora tions are actually huge ((private governments." But this, says Hes sen, obliterates the distinction be tween politics and economics. Gov ernments can compel obedience to their laws and forcibly collect taxes.

Businesses, on the other hand, can only succeed by offering something of value in an uncoerced exchange. To force a merger of state and corpo ration, which Nader wants to bring about, would scramble everything. It is what Fascism tried to do, and it did not work. @ THE NEW PROTECTIONISM: THE WELFARE STATE AND INTERNATIONAL TRADE by Melvyn B. Krauss An International Center for Economic Policy Studies Book (New York University Press, Washington Square, New York, N.Y. 10018, 1978) 114 Pages. $4.95, paperback Reviewed by Amy Mann SUPERSTITION dies hard. Over two hundred years ago, Adam Smith ex posed the fallacies inherent in the protectionist practices of England (and other nations) at that time. Trade between nations was scarcely free. Today we can pick up any newspaper and read the latest demands of a myriad of industries and special interest groups-e.g., the steel producers, shoe manufactur ers, sugar growers, labor unions all seeking protection from ((unfair"

foreign competition. Protectionism has been with us for a long time. How, then, does the ((new" protectionism of the title differ from the ((old" protectionism? Economist Melvyn Krauss, of New York University, answers this ques tion admirably. There is, he says, not only an increase in the amount of protection, but, more important, a difference in its form. He considers a number of factors responsible for this situation, and traces most of them to the growth of the welfare state. Welfare state policies have defi nite effects on international trade. The growth of the new protectionism in the Western nations parallels the growth of welfare or interventionist economies at the expense of market economies. The author's ((new protectionism" takes into account all forms of government intervention into the private economy. The system of world commerce set up by GATT (the General Agree ment on Tariffs and Trade) after World War II envisio~ed interna tional trade as free from domestic intervention and protection as pos sible. The rationale for the GATT agreements was that free trade in creases consumption alternatives 1979 OTHER BOOKS 319 for everyone, and the economy as a whole benefits. Free traders fear that protection of special interests can increase the role of government in society, which can in turn lead to more centralization and thus jeopardize the automony and free dom of markets. Protectionists:, however, argue that economic bene fits for special interest groups (usu·· ally their qwn) are more important than the general benefits to the whole of society.

If there must be some form of protection, free traders would chooSE~ tariffs over quotas or other non·· tariff barriers to trade. Tariffs dis·· tort prices, consumption levels, and resource allocation, but they are still more compatible with the free market system than non-tariff in·· terventions, which do not work through. the price mechanism and cannot always be recognized for the harm that they do. Professor Krauss discusses at some length the effects of the numerous non-tariff restrictions on free trade. A partial list of these would include domestic subsidies, export subsidies, cartels, environ·· mental measures, government pro·· curement policies, and adjustment assistance payments to workers and managers. He also analyzes the ef·· fects of massive income redistribu·· tion on Hcapital flight," Hguest work·· ers" (migrant labor), and the volume and terms of trade between nations. One form of protection which is relatively new is protection of the environment. The rallying cry of environmentalists is that we all have the ((right" to a clean and safe environment. Further, it is the duty of government to bring this about.

What is often accomplished instead, however, is protection of domestic industry. Take automobile safety standards, ostensibly designed to clean up the air, or to prevent acci dents. In effect, .these regulations keep out of the United States certain very popular and reasonably priced foreign cars such as the Fiat 500 and 600 models. The intent of the regu lations mayor may not be to keep out the imports, but that is the re sult. Motive here is unimportant. In explaining the mentality which leads to welfare and protectionist measures, Krauss quotes Daniel Bell, who has spoken of ((the revolu tion of rising entitlements." Welfare statists insist that every person has a right to economic security, a right to the job of his choice in the place of his choice, and almost at the salary of his choice. Again, citizens have the right to be shielded from changes which may bring them economic adversity, or force them to find other employment. Whole in dustries also-as well as private citizens-claim the right to be pro tected from economic dislocations.

But at what price to the individ ual consumer? Industries receiving 320 THE FREEMAN protection are the weak, inefficient ones. Wages rise too high relative to productivity. Consumers are forced to pay higher prices, often for in~ ferior goods,. and consumption op portunities are reduced. Disincen tives to produce run rampant. Why work hard? A government commit ted to ((cradle to grave" security will presumably bail out any firm or in dustry, regardless of economic per formance. Overregulation and high taxation stifle investment and pro duction. While taxes rise to pay for new programs, people do everything pos sible to avoid paying them. Workers and professionals take a higher proportion of their income in the form of leisure time. Barter, a grow ing form of tax avoidance, reduces the efficiency of the economy. Fi nally, a hidden purpose of so many of the protectionist programs comes clear: to redistribute income from savers and producers to nonproduc tive individuals. Egalitarianism is touted, while the competitive spirit and work ethic are undermined.

An economy can be likened to a living organism which, if it is to grow and thrive, must be able to adapt to the demands of a changing environment and must receive adequate sustenance (capita)). High rates of social welfare expenditure keep the economy from adjusting to change and impede capital forma tion. Stagnation inevitably results. Or, as Professor Krauss concludes: H •••the welfare state is self destructive. It both depends upon economic growth and destroys it. In the long run, the demand for a se cure economic income at a given level or rate of increase, regardless of the changes that are being wrought elsewhere, proves illusory because the attempt to attain secure income reduces the ability of the economy to produce it." The New Protectionism is highly recommended. Economists and laymen alike can learn much about the consequences of interventionist policies on international trade and investment. Considering the recent experience of England, American legislators who vote for such mea sures would be well advised to read this book. @ the Freeman VOL. 29, NO. 6 • JUNE 1979 A Strategy for the War of Ideas Sylvester Petro 323 Why scholarly books are the best ammunition in the struggle for the truth about freedom.